PZ Cussons released its Q1’18/19 financial statements
showing a 14% y/y moderation in revenue to ₦15.9 billion (Vetiva estimate: ₦17.5 billion) and beginning
the year with a ₦205
million loss after tax (Vetiva estimate: ₦1.0 billion PAT). Revenue for the quarter came in as
the lowest Q1 performance in three years and 9% below our estimate amidst
sustained difficult trading conditions according to the company.

Though Management has alluded to the implementation of
innovative marketing strategies to strengthen growth for the past three
quarters, recent performances are yet to show any benefits from these plans.
Whilst we understand that tighter disposable income has subdued sales in PZ’s
Electricals segment, the tepid performance across home and personal care
products is quite unimpressive given the stronger turnover trend observed
across its competitors. We believe a mix of intense competition, slow response
to market developments and seemingly weaker brand equity on its HPC products
have contributed in reducing market share and limiting pricing power.

High production costs,
OPEX drag operating profit to five-year low

Gross Profit came in 12% and 24% below our expectation
and the prior year respectively amid sustained margin volatility. Gross margin
came in at 29%, lower than our 30% estimate and way off 36% recorded in the
previous quarter. Meanwhile, a flat y/y performance in operating expenses
relative to the 14% y/y decline in revenue was a major drag on earnings.
Notably, Q1’18/19 EBIT printed at ₦385 million, significantly behind our ₦1.9 billion estimate and the lowest figure recorded
since Q4’13.

However, foreign exchange losses moderated 63% y/y to ₦668 million, albeit
still above our ₦420
million estimate. Overall, bottom line for the quarter came in negative at ₦205 million, marginally
higher than the ₦123
million loss recorded in Q1’17/18.

Bearish on sales
capacity for FY’18/19

We revise our FY’18/19 revenue estimate 10% lower to ₦75.1 billion (FY’17/18: ₦80.6 billion) as reduced
product prices and a lower volume rollout weigh on the top line figure. Whilst
we have left our gross margin estimate for the year unchanged, we revise our
OPEX to sales ratio 200bps higher following the Q1’18/19 surprise. As such, we
forecast a 22% y/y decline in operating profit for the year to ₦6.4 billion (Previous: ₦9.2 billion).